Cost Allocation Guide for State and Local Governments U.S. DEPARTMENT OF EDUCATION Indirect Cost Group Financial Improvement and Post Audit Operations Office of the Chief Financial Officer September 2009 U.S. Department of Education Arne Duncan Secretary Office of the Chief Financial Officer Thomas P. Skelly Delegated to perform the functions of the Chief Financial Officer Financial Improvement and Post Audit Operations Linda A. Stracke Director Indirect Cost Group Mary G. Gougisha Director September 2009 This publication is in the public domain. Authorization to reproduce it in whole or in part is granted. While permission to reprint this publication is not necessary, the citation should be: U.S. Department of Education, Office of the Chief Financial Officer, Cost Allocation Guide for State and Local Governments, Washington, D.C. This publication is available on the Department’s Website at: http://www.ed.gov/about/offices/list/ocfo/fipao/icgindex.html On request, this publication is available in alternate formats, such as Braille, large print, audiotape, or computer diskette. For more information, please contact the Department’s Alternate Format Center at (202) 260-0852 or (202) 260-0818. CONTENTS Page(s) FOREWORD…………………………………………………………………………… 3 ACKNOWLEDGEMENTS………………………………………………………….. 5 SECTION I: General Information………………………………………………….. 7-9 A. Authority B. Definitions C. Types of Indirect Cost Rates D. Approval and Negotiation of Indirect Cost Rates E. Disputes and Records Retention SECTION II: Guidelines for Preparing Indirect Cost Rate Proposals………….... 11-16 A. Basic Steps B. Determination of Indirect Cost Rates C. Detailed Steps D. Submission of Proposals E. Cost Allocation Plans SECTION III: Reimbursement of Indirect Costs…………………………….…… 17-21 A. Requirements for Reimbursement B. Application of Indirect Cost Rates C. Indirect Cost Limitations D. Administrative Cost Limitations SECTION IV: Indirect Cost Rate Methods…………………..…………………… 23-27 A. General Information B. Simplified Method C. Multiple Allocation Base Method D. Special and Restricted Indirect Cost Rates E. Restricted Indirect Cost Rates – Questions & Answers SECTION V: State and Local Agencies Responsibilities………………….…….. 29 A. General B. State Educational Agency Procedures C. Subrecipients 1 SECTION VI: Time Reporting Requirements………………………………….…… 31-32 A. General Information B. Time and Attendance Reporting C. Semi-Annual Certifications D. Personnel Activity Reports E. Substitute Systems F. Policies and Procedures SECTION VII: Common Indirect Cost Issues..………………………….……..…… 33-36 A. Compensation B. Unallowable Costs C. Credits D. Interest E. Depreciation/Use Allowance F. Subawards G. Unsupported Costs SECTION VIII: Questions and Answers……………………………………….……. 37-40 A. Application of Principles B. Federal Cognizance C. Allocation of Costs D. Subawards E. Other Items APPENDICES: MODELS, EXAMPLES AND REFERENCES……………..……. 41-101 I. State Educational Agency Model Indirect Cost Rate Proposal II. Indirect Cost Rate Agreement III. Local Educational Agency Model Indirect Cost Plan IV. Local Educational Agency Delegation Agreement V. Model Cost Policy Statement VI. Certificate of Indirect Costs VII. Website References VIII. Semi-Annual Certification Form and Personnel Activity Report IX. Documentation Checklist 2 3 4 ACKNOWLEDGEMENTS The Cost Allocation Guide for State and Local Governments represents a major initiative to provide key standards and practices in the cost determination area. State and local educational agencies provided valuable input for the contents of this Guide. U.S. Department of Education program offices provided important details to assist grantees. Nicholas Jougras, a retired federal employee and consultant, provided significant assistance in organizing and assembling the materials. Over the last two years, the Indirect Cost Group has worked extensively to ensure the Guide contains current information and addresses the needs of grantees. The current Indirect Cost Group members are Nelda Barnes; Paul Brickman; David Gause, Jr.; Hanan Hardy; Brandi Jefferson; Richard Koris; Phillip Luster; John Masaitis, Katrina McDonald and Mary Gougisha. The Office of the Chief Financial Officer expresses gratitude and appreciation to all who contributed to the completion of the Guide. 5 6 SECTION I GENERAL INFORMATION A. Authority This Cost Allocation Guide for State and Local Governments is based on the authority included in the Office of Management and Budget (OMB) Circular A-87, Cost Principles for State, Local, and Indian Tribal Governments and Education Department General Administrative Regulations (EDGAR). OMB Circular A-87 (available at 2 Code of Federal Regulations (CFR) 225) establishes the standard that one federal agency is responsible for the review, negotiation and approval of indirect cost rate proposals. As provided in EDGAR at 34 CFR 76.561, the Secretary approves an indirect cost rate for a state agency and subgrantee other than a local educational agency. Each state educational agency, on the basis of a plan approved by the Secretary, shall approve an indirect cost rate for each local educational agency that makes such a request. In the U.S. Department of Education (ED), the Secretary has delegated cost allocation responsibilities to the Chief Financial Officer. B. Definitions For purposes of this Guide, the following definitions of key terms apply: Central Service Cost Allocation Plan - the documentation identifying, accumulating, and allocating or developing billing rates based on the allowable costs of services provided by a governmental unit on a centralized basis to its departments and agencies. Cognizant Agency - federal agency with the largest dollar value of awards to an organization and that is responsible for reviewing, negotiating, and approving cost allocation plans or indirect cost proposals on behalf of all federal agencies. Cost Allocation Plan – document that identifies, accumulates, and distributes allowable direct and indirect costs to cost objectives. The plan also identifies the allocation methods used for distribution to cost objectives, on the basis of relative benefits received. Governmental Unit – the entire State, local or federally recognized Indian tribal government, including components. Grantee - the organization to which a grant is awarded and which is accountable for the use of the funds provided. The grantee is the entire legal entity even if only a particular component of the entity is designated in the grant award document. Indirect Costs - costs that have been incurred for common or joint purposes. Indirect costs benefit more than one cost objective and cannot be readily identified with a particular final cost objective. 7 Indirect Cost Rate - device for determining, in a reasonable manner, the proportion of indirect costs each program should bear. The indirect costs are included in the numerator (pool) and the direct costs are included in the base (denominator). The result is expressed as a percentage (rate) of the indirect costs to direct costs. Indirect Cost Rate Proposal - documentation prepared by a governmental unit or component thereof to substantiate its request for the establishment of an indirect cost rate. Local Educational Agency (LEA) - A public board of education or other public authority legally constituted within a state for either administrative control or direction, of public elementary or secondary schools in a city, county, township, school district, or other political subdivision of a state; or such combination of school districts or counties a state recognizes as an administrative agency for its public elementary or secondary schools. Local Government - a county, municipality, city, town, township, local public authority, school district, special district, intrastate district, council of governments (whether or not incorporated as a non-profit corporation under state law), any other regional or interstate government entity, or any agency or instrumentality of a local government. State - any of the several States of the United States, District of Columbia, Commonwealth of Puerto Rico, any territory or possession of the United States, or any agency or instrumentality of a State exclusive of local governments. State Educational Agency (SEA) - the state board of education or other agency or office primarily responsible for the supervision of public elementary and secondary schools in a state. In the absence of this office or agency, it is an office or agency designated by the Governor or state law. Subaward – an award made by a recipient to an eligible subrecipient. The term includes financial assistance provided by any legal agreement (including contracts) but does not include the procurement of goods and services. Subgrantee - the organization to which a subgrant is awarded and is accountable to the prime grantee for the use of the funds provided. C. Types of Indirect Cost Rates Provisional Rate - a temporary indirect cost rate applicable to a specified period which is used for funding, interim reimbursement and reporting indirect costs on federal awards pending the establishment of a “final rate” for that period. Final Rate - an indirect cost rate applicable to a specified past period, which is based on the actual allowable costs of the period. A final rate is not subject to adjustment. 8